Key Lessons From Bank Failures With John Maxfield

INTRO: Helping community bankers grow themselves, their team and their profits. This is the Community Bank Podcast.

CALEB: Well, hey everybody, and welcome back to the Community Bank Podcast. Thanks for joining today’s conversation. I’m Caleb Stevens with SouthState Bank’s Capital Markets and Correspondent Banking Division. Today, we’re excited to play for you an interview between Chris Nichols, our director of Capital Markets here at SouthState, and Mr. John Maxfield. John is a bank investor, he’s a writer, he’s a creative, he’s an artist. He’s really—if there was such a thing as a banking renaissance man, I think John Maxfield would be just that. He’s a hilarious guy. He’s funny, but he’s very bright, very brilliant. And in fact, he has, we think, the largest collection of bank literature—the largest bank-literature focused library, perhaps in the world. And so, he really is a jack-of-all-trades when it comes to banking. And so, today’s conversation, Chris sits down with John, and they talk about John’s written work, particularly as it pertains to lessons that we can take away from bank failure. Something that all bank executives ought to be thinking about as we consider how to stay independent and how to thrive in the coming years. And so, to connect with John, you can find him on his website. That’s Maxfieldonbanks.com. And also, click the link in the show notes to check out our own conference coming up. It’s in October. It’s the Elevate Banking Forum. We’re inviting the best bankers to Birmingham, Alabama for a 2-day event. We’re gonna be talking about the strategies and tactics that you’re gonna need to implement at your bank to survive and thrive in the future as well. And with that, here is the conversation between Chris Nichols and John Maxfield.

CHRIS: John Maxfield, welcome to the show.

JOHN: It’s great to be here, Chris. Appreciate it.

CHRIS: John, you are one of my favorite bankers. You, well, not a banker by trade. As a bank investor and as someone that probably knows more about banking than anybody walking the earth right now. I think I’ve heard you say you have the largest banking library known to man. Is that about right?

JOHN: The largest private banking library of American banking books—as far as I’m aware. There’s one other guy, Mark Lynch, a good friend of mine who also has a really substantial library. But unless he’s gone hog-wild in the last few months, I think I’ve got him beat at this point.

CHRIS: And I know the answer to this question, but you’ve actually read these books, right? I mean, you—

JOHN: Yeah, most of them, 90% of them. Yeah. I mean, there’s some here and there where, like, you’ll open it up and read a little bit of it and be like, “This isn’t worth it.” You know what I mean? But like, you still keep it, just cause like, it’s a part of the literature. And so, you want, you kind of want to have that. And this seemed to lead–calls it the “anti-library.” You know what I mean? It’s so like even if you haven’t read a book, having the book, it kind of like brings it into your sphere of knowledge. Yeah.

CHRIS: Okay. I get it. I’m every time I talk to you, I learn something. I have no doubt this is going to be the same, same type of experience. Just for the listeners out there: John has a great blog, great channel, produces some of the best interviews of the top bankers that I know of. And whenever I get down on banking, I kind of listen to John. Sometimes I just think we’re not moving too fast as an industry or we’re overly regulated, you know, number of issues that we all face every day. But John always lifts my spirit. You wrote a piece last year, I think “Banking as a Philosophy.” So, I want to start there. That a piece that I go to to cheer me up and to kind of reaffirm my love of the banking industry. Talk to us about your banking philosophy.

JOHN: So banking is—so the thing about banking is that one of the reasons it’s different from other industries is that you have. You can’t just go into banking and just kind of skate along and do okay. Like the really good bankers are those who have a visceral feeling for banking. It is not a knowledge thing. It is a visceral feeling thing. And the reason for that is there’s so little margin for error in banking. So, the typical bank is leveraged by 10X, right? And so, like that alone, if the asset values on its balance sheet declined by 10%, that alone renders it completely insolvent. But you don’t even have to go that far, right? Because you have regulatory requirements, right? And you don’t have to drop it—well, many well-capitalized banks have failed because their depositors have thought they might fail. You know what I mean? So, you have no, you have so little margin for error, and that’s why the failure rate in banking is like four to five times the survival rate. And so, the people that I have studied that have figured it out the best are those with that visceral understanding and appreciation for banking. And I consider that a philosophy, and the philosophy of banking basically reduces to simply this: banking is a really good business, unless you do something dumb. That’s kind of what it reduces to.

CHRIS: That’s it. And we have a—and we’ll talk about failures, but I think that’s a common theme in your studies about. And I know I’ve heard you say this: that everything is perfect until it’s not. Like some of the best bankers were regarded with the utmost respect until they, you know, until the market uncovered a fatal error that they made somewhere along the way. Talk about some of those fatal errors. What have you learned in setting the failures overall of baking?

JOHN: Well, okay, you learn a number of things, but the most important lesson to learn about failures is that the first rule of banking is not to fail. Okay. And that sounds kind of like flippant and curt, but like I actually mean that. And I mean that because there have been 17,000 banks that have failed since beginning this country and that’s a conservative estimate. There are about 4,000 banks in existence today. And then you’ve had 22,000 mergers since the beginning of country. And again, that’s a very conservative estimate, probably 4 to 5,000 of those mergers in lieu of failure. So again, failure is the rule, not the exception in banking. So, if you don’t, if you consider failure a taboo subject—and you don’t want to talk about it? Then the problem is that and, and I don’t mean you, Chris, but I mean as a banker, as a person, as a banker, you don’t talk about it like you’re going to leave yourself wide open to an enormous the greatest risk—existential risk to an institution. And that is the risk of failure. And I say that because when you study the history of failures, what you find is that there’s only like, a dozen reasons that banks fail. And so, if you know those reasons, oh, it gives you a really good chance of not doing those things. Just being cognizant of them. Let me give you an example. When Silicon Valley Bank failed, everybody’s like, “We’ve never seen a failure like that. That’s so unique.” No, it’s not. We have seen that time and time again.

CHRIS: I’m telling you that’s right.

JOHN: When you have deposits flood into an institution. The people at that institution are stuck between a rock and a hard space. We want to keep the money safe, but we also have to earn some yield on it. So, they go out, chase a little bit of yield and then they get hosed by buying bonds or by going into a new lending vertical or whatever. I mean, we have seen it so many times. And so like, once you see those dynamics and you realize them and you say, “Oh my God, Silicon Valley’s deposits have shot up from $60 billion to $190 billion over18 months.” We know that could be a potential problem because every other time this happened in history, those banks have failed. And so, it puts you in this position where like it really helps things. And one of the over—the big overarching lessons, I mean I can go through a whole bunch of stories and banks that have failed and why they failed. But one of the overarching commonalities that you’ll find in bank failures is that typically what they have done is they’ve taken the bank charter and done things with it that you shouldn’t have done with it. And let me give you a specific example. Corus Bankshares. It was the third biggest bank in Chicago when it failed in 2009. Okay, and what it did is it had the diversified business model into the 90s and then it decided it’s going to focus on commercial real estate not only just commercial real estate, it’s going to focus on condominium construction and conversion loans.

JOHN, continued: In the hottest markets across America. Miami, Scottsdale, Las Vegas, San Diego.

CHRIS: That’s right.

JOHN: Okay. And like and they go out and they do all this stuff and then like they take these deposits, and they just pay because they just, they get a national deposit network where they’re paying these ridiculous rates for CDs and pulling deposits in from all over the country. And then lending that money to these condominium developers and these hot locations. And so, what you’ve done is you’ve taken the bank charter and basically created yourself a hedge fund. And so, what you’ve forgotten is that with the bank charter and all the amazing things that come with that, comes the responsibility to do it right. And oftentimes, when you look at failures, that’s what you find. They took an—they had an opportunity to do it right and they chose the opposite direction.

CHRIS: Yeah, you have a quote to that very point that I think is interesting, particularly for new bankers. That banking is one of the only industries that has almost infinite demand in some of its services. In fact, and I quote you all the time and use the example that if you make water free, there’s only so much water a household could use, or a business can use. And so, the demand has a plateau. But banking is not that way. Talk to us a little bit more about that philosophical aspect on capital and deposits and lending.

JOHN: That’s an awesome question. So, when you think about banking and you compare it to other industries, what you have to understand is that the supply and demand dynamics in banking are completely opposite to supply and demand dynamics in any other industry. Okay, and why is that? And this is kind of what you alluded to. That is because the nature of the product which banks sell, okay. Like if you sell corn, like there’s certain supply and demand dynamics associated because it’s corn, right? Because it’s a commodity that, like you know, like it can go bad really quickly. So, you see that in the supply and demand curve. Well, in banking, what you see in the supply and demand curves is that there’s an infinite demand for credit. Let me give you an example. Let’s say you, Chris, come to me and say John SouthState has determined that you’re really good credit risk. And we’ve decided that we’re going to make him a loan for however much money he wants, for as long as he wants it at. And it will, it’ll be at a floating rate always 100 basis points below the prevailing rate. How much money do you want, John? John would say, “I want all the money. Give me all the money.” I mean, like, so you can have one individual who’s thinking rationally who can sin because you can take all the money in resident post if it’s a shoe store. And let’s say you wanna grow really fast, right?

JOHN, continued: Like you can cut the price of shoes to $1.00 a shoe or Mercedes to $1.00 in Mercedes. But like, even if a Mercedes was $1.00, I probably only buy five of them. But with all the money you can, because it’s not, you don’t have that physical constraint. So, you have the infinite demand. So, what that means is that that puts, in every other industry. It’s like you’re on the planet Earth and you’re fighting gravity to get off the ground, right, to grow, to get off the ground. All your energy is exerted to get up. Banking. Exactly opposite. Just like on the moon. Your energy, the energy of good bankers, is exerted to stay down on the moon, right, and you don’t want to just fly off into space because, you get too far from the moon, you can’t recover from that. You know what I mean? And so, that’s a really important dynamic. But there’s another really important dynamic in banking that is different than other industries that plays into this. And that is the banks face an opaque cost of goods sold. Okay, so you sell shoes. You know your cost of goods sold because you go and you look at the invoice for the shoes that came in. Right? Your cost of goods sold in banking, your primary cost of goods sold is the credit cost. You don’t know what the credit cost until that loan is paid off. So, you’re sitting on the loan portfolio, you’re sitting on this portfolio of stuff that you don’t know what the quality of it is. And that is a problem because what happens is that you’re going through good times and credit is really great. And so, you think I’m really good at this. I’m going to go keep doing this thing that we just started doing and like we’re getting no charge offs because you haven’t been through that thing in a cycle.

JOHN, continued: So, you don’t know how it operates, but you’re looking at your loan portfolio and you’re getting all these false positives and it’s just because the economy is good, right? And the economy goes bad. And that’s when chickens come home to roost, right? That’s when the tide goes out, you know, and kind of buffets. And Buffett’s phrase, and so like, you know, you have all of these things. And that’s why, like, that visceral feeling is so freaking important when you add that with this little margin for error, and then you add the other element is that, like in Warren Buffett’s 1990 shareholder letter, which is probably the most important thing ever written in banking, he talks about the institutional imperative. And what he’s basically talking about is bankers’ tendency to move in herds. So, like one banker will go and do something and then another banker will follow. Why is that? That is because you because money is a true commodity. When you’re in a market, the person who’s willing to price the least can take all the market share. Right? And so like you have that dynamic too and you put all those together and that is why banking, while it’s simple is incredibly hard to do right.

CHRIS: Let’s keep going. So, we have some good takeaways there. You alluded to the fact that it’s a positive reinforcement cycle, like when you’re making condo loans and construction loans, everyone’s high-fiving and you walk into the board and you are a, you know, a walking God for producing all this growth and all these new customers. Your customers love you. Your employees love you, everyone loves you, and so you keep doing. Until you can’t. And your part about the opaqueness, I would just want to underscore that it’s even worse because a lot of bankers think they know their cost of goods sold and they don’t because they’re looking at a point in time. But really, it’s when, like you said, you sell a widget, you’re done. But in banking, you have to live with that deposit or you have to live with, you know that loan, for 5, 6, 7, 10, 15 years, and sooner or later, you know the time goes against you, the economy goes against you and now you have to pay the piper, so to speak.

JOHN: To your point, Chris, I mean you said that better than I could have said that. But like when you listen to quarterly conference calls. And I hear CEOs talking about their pristine credit quality. I think, “You don’t have pristine credit quality. You don’t, you just don’t know what it is.” Like, anybody who’s going around saying they have pristine credit quality. It shows that they fundamentally misunderstand a really important element of banking.

CHRIS: That’s right.

JOHN: And that is, that—a loan isn’t good until it’s paid back. You know what I mean? A loan isn’t good until it’s good, you know what I mean?

CHRIS: That’s right. Until you have the money back.

JOHN: What I mean? Like everybody asked about credit costs, you just say like, “We are doing our absolute best. We’re following the guidelines. And we believe that we have a portfolio of really good stuff, but we are confident in that.” But like you know, that’s the best we can say about that, you know?
CHRIS: And one of the lessons that I think that you impart is to be a top performing banker, you have to have your own governor, your own sense of how fast you can grow and how much risk to take on because as we just talked about, everybody in the world is supporting you and wants you to go more. Talk a little about that, that some of the best bankers you’ve interviewed have that, that sense of self governance.

JOHN: So, when you think about that dynamic with infinite demand and an opaque cost of goods sold and how quickly you can grow a bank as a result of that, if you want to, and then how so many executives are compensated. And let me be clear real quick before I continue on this track, I am like the most, I’m the biggest advocate for banks in the country. So, when I like when I’m criticizing them in this way, I’m doing it for us, for the banking industry, you know, I mean? I want anybody listening to this to think that like, I’m slamming on banks like, this is what, I’m in this. You know what I mean?

JOHN, continued: So, because they can grow as fast as they want, they have to self-govern. What you find is that like all the pressure on themselves is to grow as fast as they want because they’ll earn more money and we know that humans act in the short-term route relative to the long-term, right? Their employees out there trying to sell these loans feel the same way. They want to sell more loans, right? So, they’re putting pressure on you. Your shareholders are putting pressure on you, commentators and analysts, these clown analysts, when they’re putting pressure on you, all the pressure on you is to do the wrong thing. And so, what you find is that when you actually take the top CEO in the country, irrespective of location or size or business model, what you find is that the ones that are the best are the ones who like are able to make their own decisions and put all that pressure at bay. And most importantly, what they do is they adhere to the fiduciary duty against self-dealing. Because that what is what it’s fundamentally about. Like if you are not self-dealing, the amount of value you create with the bank is extraordinary. But if you are self-dealing, and by that I mean, like making acquisitions you shouldn’t make just in order to get into a higher compensation bracket or growing too fast to increase your compensation or something like that. If you’re doing stuff like that, like your bank is not going to make it, you know what I mean? And so, then you then you start looking at the archetypes of these CEOs. The top CEO in America, and of the modern era, is Mick Blotnick Okay, Mick Blodnick ran Glacier from 1998 until 2016. And he created more shareholder value during that tenure than anybody ever before in the history of banking. Okay. And he and Robert Wilmers kind of went back and forth, went back and forth. But like, then you look at like Robert Wilmers and Mick Blodnick, you look at their compensation, they got paid less than everybody else in their peer groups.

JOHN, conintued: And they’re boards all along the way we’re telling him, “We need to raise your pay. We need to pay you more. We need to pay you more.” And both of them are like, “No, we get paid enough.” Like now. Both of them got rich, okay, because, like, they held the stock, but they got rich the right way, right? But like Mick Blotnick, I mean, we once calculated, he probably could have earned $50 million more if he took that salary increase, but then Mick Blodnick wouldn’t be Mick Blodnick. You know what I mean? And so, Chris, the last time I saw you was at the Skamania Lodge up in Washington. And I was talking about this stuff. And like, you think about, like the fiduciary duty and self-dealing, like those guys really lived it. They gave better performance to anybody else, and they demanded less pay. That is what fiduciary duty is. So, I was telling—I’ll you this little story. I was going outside, and I was walking to my car and just there’s a little gaggle of bankers, those three bankers and two CEOs, and then one like, VP. I know the guys, and they’re drunk. And one of them says, “Oh yeah, John, we’re really going to cut our salary now.” You know, I’m like, a nice guy. You know what I mean? And I’m not gonna go after this guy cause like, he doesn’t have a chance against me, particularly when he’s drunk. You know, I don’t need to do that, you know? It’s like a prized fighter beating up a kindergartener. You know what I mean? But in my head, I thought, “He’s a living embodiment of this. This guy, he’s a CEO of a bank. He’s drunk.

JOHN, continued: He jumps in a truck with two other drunk guys. To get more drunk that night. And the performance of that bank is horrible. And they’re under a consent order. And then he’s now joking with me, telling me that, like, oh, like it’s a big joke. What that tells me, that is a big “FU” to those shareholders.

CHRIS: And customers.

JOHN: And the country. Our tax dollars back up this industry. So, if you take that charter and you use it exclusively for yourself and not for all of us, that’s not right. You know what I mean? And but, and you can get so rich and do so well in banking by doing it the right way. That’s the thing. That’s the thing. So rich and do so well by doing it the right way. Doing it the wrong way, there’s—

CHRIS: That’s right. You get 8, 10 times leverage. Don’t abuse it. For sure.

JOHN: Just take your 12% on your equity every year. Just take your 12%, take your 12%, take your 12%.

CHRIS: That’s right. It’s like a coupon.

JOHN: Yeah, exactly.

CHRIS: So, let’s finish off failures. So, you talked about Silicon Valley. It was similar to the, you know, Penn Square failure. You talked about Corus and, God, there’s you know long list of 1,000 you know 2, 000 banks that have failed because they specialize in certain high growth industries mostly, I might add, mostly around construction. Either, you know, single family homes or what have you. What are the lessons in failures have you picked up?

JOHN: Okay, let me tell you, this is my favorite lesson about failure that I learned. Okay. And you’ll appreciate this. Okay, so there’s this narrative in the banking industry right now. Innovate or die. Innovate or die. Innovate or die, right? And that’s being jammed down our throats. Not like bankers’ throats, right? Like, that is the narrative right now, right?

CHRIS: Every conference, that’s right.

JOHN: Every conference. There are the FinTech guys up on stage, and it’s like how banks don’t care about the customers, they don’t know anything about innovation, any of that kind of stuff. Okay, but here’s the interesting thing. Like when you look at the history of failures, what you find is that not a one bank has failed for lack of innovation, at least that I’ve been able to find. And I have studied 15 – 16 years, looking for these things. But many banks have failed by over-ambitious innovation. And that’s because that slight margin for error. But here’s the more important point. Okay, here’s the more important point. And the more important point is that, when I go to a FinTech person and you know, he’s sitting there with his Patagonia vest, and he’s 25, and he went to Stanford and he’s telling me that bankers don’t know anything about satisfying the customers or anything like that. Or like, you know what I mean, like innovation. And I said, “Well, tell me about your company.” And he said, “Well, you know, we’ve been in business for a year and a half.” “So, how much money do you make?” He said, “We’re not profitable yet.” I said, “So, you’ve been a year and a half. The average bank in this country is 102 years old. And you’re telling me that these people don’t know how to innovate? They’re riding horses to work. You know what I mean?

JOHN, continued: Like banks know how to innovate, and that’s an important point because you shouldn’t—what they’re trying to do with that narrative, is they’re trying to hijack it, and introduce fear into it. So, you cannot make a rational decision. And so, you would just sign the contract with their FinTech company because you’re afraid.

CHRIS: That’s it.

JOHN: Banks should never act out of fear. And we should not support a narrative that tries to get them to do that because banks are too important in this country. So, what I would want to think I tell bankers and one of the things you learn about is that, like, chill. Don’t worry about these clowns that are out saying this stuff. Keep doing the right thing every day. Get better every day. Treat your people well. Treat your customers well. And it’ll work out in the end. The bank’s an amazing business model.

CHRIS: So, let’s turn to where you’re going, the other side of failures, top performing banks. You not only have interviewed, but you’re friends with some of our top performing bankers. You met mentioned M&T, Bob, I think Renee Jones, you count as a friend as well, Ross McKnight. What have you learned from these top performing bakers?

JOHN: So, well, let me answer that on two levels. Okay, so the first is, like: what have I learned about banking? Right. And this is what I’ve learned. And so, and I’ll tell this story about First Financial Bank shares in Abilene, TX, run by a good friend of mine, Scott Dueser. He’s longest serving CEO of that bank. He’s been CEO for 33 years. They’ve only had 7 CEOs since it was founded in 1890, okay? It’s the only bank in America has earned profit every single year for over 100 years. In fact, it’s earned a profit every single year of its existence, including the first six months in business in 1890, which was a serious financial crisis. Point being, this is a bank that knows how to bank. And you say, and you look at like its valuation and like for years, it traded at 4, 4.5, 3.7 times book. And I was on the KBW Regional Banking Index, and nobody was even close. Nobody was even close. And you say like, and me and Scott would like, I’d ask him, “So why is that?” “Because we got a good trust business.” And you know, this and that, and like you asked like kind of these other the people in the industry and that’s kind of the same answer you’d get.

JOHN, continued: So like, that is an unsatisfactory answer. This is bank in Abilene, TX that’s been through the oil crisis. And like it’s the only one like it. It was the only bank in Abilene to survive the Great Depression. It’s the only bank in Abilene survive in 1980s. That is an unsatisfactory explanation, you know what I mean? And so, when you do it, when you regress all the different, if you take like the regional bank index and you regress all the different performance metrics against the valuations like what you’ll find is that like there’s no, there’s no consistent pattern. With First Financial, that explains why First Financial is so superior. And what you find is that like the only metric that it is superior on the KBW regional banking index is the standard deviation of its return on assets over a full cycle.

JOHN, continued: And we think about banking, what is banking? Banking is the compounding, it’s a game of compounding. And it’s perfect compounding. It’s dollar upon dollar. You don’t have a thing coming in, like a car in the middle where you got to, you know, buy the parts, and that’s just dollar on dollar. Do you know what I mean? It’s compounding. And so, what you realize when you look at that, and there’s a theory in find that’s called variant strain, and that says that look you take two identical portfolios in terms of their average annual return over a period, the one that is more variant over that time period will have a lower total return even though it’s the same exact average annual return. They call that variance drain. It’s the same idea in banking. Banking, you can just compound and create so much freaking value, but you have to use that parabolic curve of compounding. That’s where you make that value. So yeah, I’d say that’s kind of one of the other kind of like points I’ve kind of, like picked up along the way.

CHRIS: And, just to underscore that point, the compounding, unlike having a remanufacture a car to the same customer, a customer keeps their deposits in or keeps that low outstanding, you’re compounding it almost a frictionless rate. You’ve already expended most of that. So, minus a little maintenance cost here and there, you can keep compounding at a very nice, little friction methodology.

JOHN: I mean, if you compound it 12% over a long period of time.

CHRIS: There you go.

JOHN: You’re gonna make a lot of money.

CHRIS: That’s right. That’s right.

JOHN: But you shoot for 20, you’ll get your 20, but you’ll also get your zero.

CHRIS: What lessons can you teach us about geography or size? You’ve studied some big banks, some large banks. You know you’ve hung out with M&T on the regional side. I know, you know, you talked to the national banks and even the small banks in rural Abilene, TX. Or, you know Kalispell. What can you tell us about that?

JOHN: Let me tell you another just kind of—this is kind of tangentially related to that, but I think this kind of touches it. It kind of goes to the same point that I think you’re getting at and that is that there are misconceptions in banking. There are misconceptions in banking that like even people who are really, really good at it and have been doing it for a long time are under. And one of those misconceptions is this idea that capital is king, right? Like how many times, like when you’re going through hard times as a bank saying, “Oh no, my tier 1 tangible common equity ratio is 12% and only has to be 10%. So, like I have 2% more. So, I’m totally safe.” Right, like, what’s funny about that is that when you go back to like 2008, when you look at the 10 Q’s for the third quarter of 2008, of all the big banks, who was the best capitalized? Washington Mutual.

CHRIS: That’s right. That’s right.

JOHN: It’d just gotten 9 million dollars from TBG. You know what I mean? And they failed it. Silicon Valley bank, go look at its last Q. Look at how it compared to its peer group in terms of its capital ratio. It did really well. I mean it was much better capitalized than a lot of banks. And the point is that capital is not king, because you think about it like this. Like you’re telling me that if you’ve made a bunch of bad loans and your asset portfolio, which is this big, and your capital is that like this, this tiny little difference right here is gonna make any difference? Doesn’t make any difference. And so, capital isn’t king. What’s king is confidence.

JOHN, continued: Once confidence goes, your institution is gone, and that’s what you see with like a Silicon Valley. It wasn’t the capital thing. It wasn’t anything else. It was just confidence. It was just confidence that went, and it wasn’t even—the regulators weren’t even bearing down on it. I mean, all that stuff was in its health maturity portfolio. You know what I mean? And so, it’s like when confidence goes—and so, this is important because failure is so omnipresent in banking. So, there’s a study in the 1920s about—there were a whole bunch of bank failures in 1920s because there was an agricultural depression. And there’s a study in Florida that, like, looked at it like at 1,100 of those failures. So, what caused them? And they went through like, you know, like agricultural commodity prices declining, that’s 5%, you know, like, whatever, fraud was 10%, whatever it is. 51% were just false rumors. False rumors. 51%. 500-600 hundred banks failed because that’s how fragile these institutions are. And so, when you get into that spot, don’t think capital is going to save you. All your messaging needs to be around confidence. Confidence. Why they can believe you. Why they can be confident in you. Why they can trust your decisions. You know what I mean? Like—It never has, never will.

CHRIS: And you know, I get your point of confidence. I would say, you know, I held Silicon Valley Bank out as one of the banks with the best brands. And First Republic in the same manner. For that to happen and, granted you can quarter it—the risk practices et cetera. But at the end of the day, if you have that strong a brand, both those banks, that much capital, that much confidence before, and you can go out of business in 4-ish days, you know banking needs to take note. That could be the new paradigm and I, you know, I pray that when we do see the next credit crisis that, you know, banks are talking about their confidence and talking about, you know, hopefully applying resources and managing their downside, because the real downside is much greater, as we’ve learned.

JOHN: Here’s another thing. You kind of alluded to this, Chris, and this is an important point and that is that, when Silicon Valley Bank went down, a good friend of mine, he runs a very important bank, he went on TV and he was kind of critical of Silicon Valley Bank in the risk management practices. And I called him. I said, “You cannot go on TV and be criticizing your peers, in the midst of a banking crisis. Because the banking crisis, it stands one or stands all.” You know what I mean?

CHRIS: That’s right. It hurt all of us.

JOHN: Like unless, unless you’re gonna ask US taxpayer to come and bail your ***** out. You’re all either good or you’re bad. You know what I mean? It’s like, don’t go out and say these things. You know what I mean? And the other thing is that like when you put your mind into the mind of that CFO, at Silicon Valley, like you can see how it would happen. This dude said there were $60 billion in deposits at the end of 2019. 18 months later, he’s got $190 billion. What’s he going to do with that? That is a ridiculous what he did with it, but like, we cannot even begin to fathom the pressure that this guy felt to deploy that money.

CHRIS: That’s right.

JOHN: I can’t say I wouldn’t have made the mistake. And I know a lot about banking.

CHRIS: To underscore that then, had they made those same decisions in most other interest rate environments and economic environments, they would have gotten away with it. But because it was at the very bottom, right before the Fed height, you know, the problems were compounded and then more monetized.

JOHN: And if you look at the banks that have trouble, what were they? What was the one commonality that they shared? They all saw a huge influx of deposits. Silver Gate, Silicon Valley, First Republic, Signature. Because they’re out there doing the BC stuff. And so, all this money flows, liquidity floods in. And that’s where a bunch of it floods, and that goes all to them. And so, it’s like that, because that’s another thing about, like banking being different. It is not scarcity that you have to optimize around in banking, like it is in any other industry. Scarcity demand, scarcity supply, scarcity real estate, scarcity labor. You don’t have to optimize around scarcity in banking. You have to optimize around abundance.

CHRIS: That’s right.

JOHN: That’s what’s going to cause you problems. Abundance begets failure. In every other industry, scarcity begets failure, and in banking abundance begets failure.

CHRIS: Growth kills. I talk a lot about the quality. You have to understand the quality of growth. Is that growth organically stable or like you said, is it volatile?

JOHN: You know, and it’s hard to know sometimes, Chris. I mean, you and I have been doing this for so long that even us, we, even we can look at a bank like Silicon Valley. And be like this is the paradigm of banking today.

CHRIS: Yes.

JOHN: And then like, two weeks later, $70 billion floods out in one day.

CHRIS: Paradigm changes, yeah.

JOHN: So, you take such humility. You know what I mean? Like to do what we do right, I think.

CHRIS: So, talk about the future, as we wrap things up. Where do you see the future of banking going?

JOHN: The big question in banking is how many banks are there going to be in the future. That’s the big question. And so, you have to understand, I think there’s two things that to understand in that in that regard. The question is why do we have 4000 banks today? Number one. Number two, like, what does that mean? Where are we gonna go? So, we’ve been coming down. The top number of banks in the United States was in 19 and 21. We had 31,000 banks in this country. A whole bunch fell off in the 1920s. Whole bunch more in the 1930s. Plateaued. And then there was an oil crisis. And then we’ve had consolidation ever since because they opened up the banking, the laws for Interstate branch banking in the 80s and 90s. So, but that big run up, up to 31,000 banks, what caused that?

JOHN, continued: That was the that was—it started in 1879, finished in 1921. That was the birth of disposable income. Trade patterns in the world switched. Money was flooding in the United States. Banks arbitrage money. If there’s more money, there’s more banks. The birth the disposable income is here in the United States. So, all that money, right? So, sending these accounts. Never before had there been money in accounts. And to put a finer point on that, in 1884, the average person in America had $4.00 on deposit. Okay, now just that population is like, I don’t know, like 30 bucks or something like that, but that’s not very much money. That totally changed in the Gilded Age. And so, we’ve been coming off this trend for the birth of disposal income. The question is how far are we going to go? And so, you can answer that kind of questions two different—there’s two kind of different things that can help to answer that question.

JOHN, continued: First, look out in the world and see how many banks every other country has. If you do that, what you find is that we have like 4,000. Number two is Russia with 400, and then everybody else is even farther below that. So, we’re like way up here. And then you have to ask yourself, why are we so different than any of these other countries? And so, one of the reasons that, it’s because this is where disposable income was born. So we needed banks here first. So, we’ve been coming off of that ever since. Number one, number two. Then you say, “Okay, well, like, where are these banks? Where are the 4,000 banks? And you look, and they’re like 50% of the banks in ten states. It’s Nebraska, Kansas, Oklahoma, Texas, Wisconsin, Michigan. No. Wisconsin, Ohio, Illinois, Iowa, and Missouri, I think. And why are they in those states?

JOHN, continued: They’re in those states because the agricultural land in those states is so tremendous. The topsoil there is like a foot deep. And that matters because, what you see in those states when you fly over those states, the fragmentation of the farming industry in those states, you see the farms just like these tiny little farms, these crowds, these pivots, these crops crop circles as far as the eye can see. And though a lot of those are still independently owned, they haven’t been consolidated because when you have foot soil that’s a foot deep, your biggest clown, Uncle Gary, can run that farm and still make money. You know what I mean? You’re not gonna sell the golden goose. You know what I mean? So, you’ve had much less consolidation there. And so, if you regress the number of banks in each state in the country versus the number of farms in each state, I mean, it’s almost a perfect regression.

JOHN, continued: And so, what that means is that the consolidation in banking is most likely a function of the consolidation in Ag—and why is that? That is because Ag lending is so incredibly bespoke, like I come from an Ag community. I come from a family in Ag. And so, we owned farms, and we had farmers. And you got to know, like is the farmer drunk? Does he drink and drive? Does he take care of his equipment? Does he park it in the, you know, in the barn at night, or does he leave it out for the rain? Is does he know how to farm? Because are there indentations on the land with the water settles, like because—there’s been good and bad yield between good and bad farmers, 30% on the same piece of property. And so, like it’s so bespoke that you have to have local knowledge. And so, that has fought against the consolidation trend. You still have a need for all these little Ag banks throughout the country to make those loans. And so, like that’s really—it’s impossible to say how many banks will have in the future. I think it’s fair to say we will have banks. The business model has been here forever, and people said it’s gonna go away forever, but it’s still here. I think it’s gonna be here in the future, but it’s impossible to say, but I think that’s where the answer is going to lie.

CHRIS: Well, hopefully we’ll see. I think we’ll see some consolidation coming up in the next five years. So, we’ll see what happens in the future. John, it’s been fantastic having you on. Appreciate the time. If you’re listening to this and you want to you follow him, Maxfield on Banks. I encourage everyone to check out your writing, and particularly—near and dear to my heart—as I’m a big fan of your artwork. So, he’s one of the only baking artists, I know as well as a banking historian, and one of the best writers in banking. So, he’s worth a follow Twitter or X. LinkedIn. Are you on LinkedIn?

JOHN: I’m on LinkedIn. I’m not very active on LinkedIn, but I’m on there.

CHRIS: Well, X, and Maxfield on Banks. Go follow them. John, thank you very much. Appreciate you.

JOHN: You’re the best, Chris. Appreciate it.